ii view: Sage sales soften but guidance reaffirmed

Trading update for nine months to 30 June

• Total revenue up 9% to £1.74 billion
• Business Cloud revenue up 16% to £1.39 billion

Chief financial officer Jonathan Howell said:

“Our continued success in transforming the workflows of small and mid-sized businesses, supported by our focus on innovation and investment in AI, underpins confidence in our strategy to deliver sustainable, efficient growth."

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ii round-up:

Accounting software provider Sage Group (The) (LSE:SGE) today detailed a slight slowing in revenue growth, but reiterated previous guidance for annual growth to broadly match that achieved in the first half.   

Adjusted revenue for the nine months to late June of £1.74 billion was up 9% year-over-year, but less than growth of 10% at the half year stage when sales were £1.15 billion. Growth for its biggest region, North America, and accounting for 45% of overall sales, slowed to 12% from 13% to total £786 million

Shares in the FTSE 100 company initially fell 7% but later recovered to trade down 1%. Sage shares came into this latest news down around 7% year-to-date, similar to IT equipment seller Computacenter (LSE:CCC). The FTSE 100 index is up 7% in 2024. 

Sage’s accounting and payroll solutions software is used by millions of Small and Medium sized Enterprises (SMEs) around the world. 

Driven by new customers, sales of Sage software located at datacentres or in the Cloud rose 16% year-over-year to £1.39 billion. That’s down from growth of 18% in the first half. Other customers continue to use desktop located software. 

Sales for the UKIA region, comprising Northern Europe (UK & Ireland) and Africa & Asia Pacific, improved 8% to £497 million. European sales grew 6% to £454 million. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on Sage shares post the trading update. Full year results are due 20 November. 

ii view:

Started in 1981, Sage today employs around 11,000 people. Headquartered in Newcastle, rivals include Nasdaq 100 company Intuit Inc (NASDAQ:INTU) and its QuickBooks product, as well as other software companies such as Workday Inc Class A (NASDAQ:WDAY) given other products to aid with business administration. Sage’s strategic focus includes building its cloud-based business and expanding its diversity beyond financial accounting. 

For investors, elevated borrowing costs for its base of SME customers could see some of them not survive current economic difficulties. Costs for businesses generally remain elevated. Competition from the likes of Intuit is not to be ignored, while an estimated one-year price/earnings (PE) forecast above the 10-year average suggests the shares are not obviously cheap.  

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To the upside, success in growing its cloud-connected customer base continues to be made. Diversity of both product and geographical region exists. Artificial intelligence (AI) powered services are being introduced to its customers, while more than 20 years of consecutive annual dividend increases leave the shares  on a forecast dividend yield of close to 2%. 

On balance, and despite continued risks, this well managed UK tech company looks to remain deserving of its place in many already diversified investor portfolios.

Positives: 

• Product and geographical diversity
• Progressive dividend policy

Negatives:

• Uncertain economic outlook
• Valuation not obviously cheap

The average rating of stock market analysts:

Strong hold